They say that a rising tide lifts all boats, but the same can't be said about companies operating cruise ships. Last year was rough for the industry. All three of the largest cruise operators suffered brutal declines in 2020, including Norwegian Cruise Line Holdings (NCLH -7.45%), whose shares sank 56% for the year.
Along comes Disney (DIS -1.79%), an operator of four cruise ships and growing, with its stock climbing 26% last year. Obviously it's not the media giant's premium fleet of family friendly ships that's driving those shares higher. Disney has exploded on the digital scene with the success of Disney+, breathing new life into the House of Mouse.
Norwegian Cruise Line and Disney are moving in different directions these days, but which one will be the better investment? Let's size up the two very different companies to see which one is the better buy.
That sinking feeling
It's hard to find a more problematic industry in the new normal than cruising. By the time that Norwegian Cruise Line and Disney resume passenger sailings (tentatively slated for May), it will be 414 days between revenue-generating voyages.
Disney will be fine. Cruise ships are a small part of its entertainment and leisure empire. It should post a loss later this week for the fiscal period that ended in December, but most analysts see a return to profitability for the current quarter.
Norwegian Cruise Line will be sailing this red sea a bit longer. Analysts don't see the company back in the black until the latter half of 2022 at the earliest, and that's going to mean more dilutive debt and secondary stock offerings. The dilution is more pronounced at Norwegian Cruise Line than you think. The stock has been cut by more than half since the start of 2020, but its enterprise value has only declined by 11% (going from $18.3 billion to $16.4 billion in that time).
Investors eyeing Norwegian Cruise Line as a depressed turnaround play may not realize that the actual value of the company hasn't fallen as hard as the stock price. It will take Norwegian Cruise Line at least a couple of years to get revenue back to where it was in 2019, and it will take even longer than that to catch up to where it peaked on a per-share profitability basis. In short, Norwegian Cruise Line is a lot riskier than stock charts may suggest.
Disney also isn't perfect. The shares have rallied sharply on the explosive popularity of its Disney+ streaming service, which went from zero subscribers to 86.8 million in less than 13 months. And later this week, we should see how well it's faring on that front.
But the success of Disney+ does come at the expense of some of its legacy businesses. You can be sure that DVD and digital sales are falling as folks know that most of the media mogul's vault is now available on demand. Disney+ is encouraging folks to cut the cord, and that means Disney is missing out on juicy fees it collects from cable and satellite television providers. It's a trade-off, but Disney is doing the right thing by disrupting its own model before somebody else did it first.
Disney is not exactly running on all cylinders right now. The turnstiles are currently locked at half of its global theme park resorts. Movie theaters are fading, drying up a once-lucrative revenue channel for the Hollywood bellwether that put out the six highest-grossing films of 2019. Disney+ is also a drain on resources, and the segment isn't expected to be profitable until fiscal 2024. But it's still hard to recommend Norwegian Cruise Line over Disney here.
Norwegian Cruise Line is a distant third in an industry where not every major player will survive. Some of the industry's biggest fans have been burned by cancellations and slow refunds, and folks who have never sailed before aren't likely to take a cruise anytime soon after how quickly COVID-19 spread on some ships.
There's a bullish case to be made that the aggressive flow of stimulus checks will fuel a quick recovery for the recession, and pent-up travel demand will benefit Norwegian Cruise Line. The same argument can be made for a Disney vacation (including its sailings), but in the media giant's case there is a wide range of products, experiences, and digital content to cover all price points and aspirations. Disney is the better buy in this case, and it's not even close.